Modern Monetary Theory, a Green New Deal and inflation

Voices on the left have been calling for a Green New Deal as a radical way of transforming the economy in order to tackle a confluence of crises: environmental, social and economic. It takes its name from FDR’s efforts to overcome the Great Depression in the US during the 1930s.

Yeva Nersisyan and L. Randall Wray, both proponents of Modern Money (or Monetary) Theory (MMT) have produced a short paper published by the Levy Institute in which they attempt to answer the question posed in its title: Can We Afford the Green New Deal?

The GND itself could include a “carbon-neutral energy policy and reversing climate change; universal single-payer healthcare; student debt relief and free public college; prison reform; ending “forever wars”; increasing care for the young, sick, and old; and the job guarantee.”

Employing their MMT framework, they argue that “there are no meaningful financial barriers to taking action”, rather “the question is whether sufficient real resources – workers, plant and equipment, raw materials – can be marshaled to implement” it. They draw inspiration from John Maynard Keynes’ 1940 work How to Pay for the War, making the case that the main barrier to such an ambitious government programme of public spending is inflation fueled by excessive aggregate demand, which can if necessary be curtailed by raising taxes or, should this prove insufficient, by other measures used in wartime such as price controls and rationing.

Nersisyan and Wray state that “excessive spending…creates problems not in terms of higher government deficits and debt, but in terms of true inflation” and that “taxes are used not to finance government spending, but to withdraw demand from the economy, creating space for government spending to move resources to the public sector without causing inflation.” Continue reading

Keynesian economics – back from the dead?

Here is an interesting recent lecture given by Robert Rowthorn on the “main developments in macroeconomics since the anti-Keynesian counter-revolution 40 years ago.” It can be downloaded for free. Alternatively the video of the lecture can be viewed here.

Rowthorn is Emeritus Professor of Economics at Cambridge University. Back in the 70s and 80s he was very much a Marxist, but has since moved away from that commitment and written on a wide range of topics, from Kaleckian growth and distribution theory to deindustrialisation in the advanced economies and the economics of the family.

For those who are interested in development economics, he supervised the PhD of another prominent Cambridge economist, Ha-Joon Chang, who has written a number of popular books alongside his academic work.

This is the rest of the abstract of Rowthorn’s paper:

It covers both mainstream and heterodox economics. Amongst the topics discussed are: New Keynesian economics, Modern Monetary Theory, expansionary fiscal contraction, unconventional monetary policy, the Phillips curve, hysteresis, and heterodox theories of growth and distribution. The conclusion is that Keynesian economics is alive and well, and that there has been a degree of convergence between heterodox and mainstream economics.

All of these topics are relevant to today’s economic problems, and Rowthorn argues that “many leading economists in the USA and the UK have Keynesian sympathies”.

Thanks to The Case For Concerted Action blog for drawing my attention to this lecture.

A low-inflation world and what to do about it

The Economist magazine recently published a special report on the world economy, looking at the ‘problem’ of low inflation. More than ten years have passed since the beginning of the Global Financial Crisis and Great Recession, and inflation is now strikingly low in many rich economies. This is despite unemployment falling to historically low levels in countries such as the US, UK and Germany, although it remains much higher in a number of European countries that have yet to recover from the worst of the eurozone crisis.

Normally economists expect wages to rise faster as unemployment falls below some critical level and the labour market tightens, and at some point this has tended, at least in the past, to lead to higher inflation.

In the US and UK, wage growth has been picking up, but inflation has remained low, and has even undershot central banks’ inflation targets. Wage increases are relatively good news for workers after a decade of sluggish or stagnant earnings growth, but remain weak compared to those seen prior to the recession. Continue reading

Heterodoxy on central bank independence and monetary policy

In the wake of Donald Trump’s call for lower US interest rates in the midst of solid economic growth and low unemployment, The Economist magazine ran a couple of articles on the threat of populist leaders to central bank independence (CBI) and low inflation.

It is more than 40 years since the publication of the intellectual justification for CBI of Finn Kydland and Edward Prescott, propounding the idea of time inconsistency. Based on the concept of the natural rate of unemployment (NRU), political control of interest rates will give rise to the temptation for politicians to boost aggregate demand and lower unemployment in the short run, below the NRU. This will prove unsustainable over the longer run, merely producing higher inflation, with inevitable costs to economic efficiency and growth.

This was apparently what caused the stagflation of the 1970s, when unemployment and inflation rose together, undermining the putatively Keynesian Phillips curve. The upshot is that politicians and voters are better off with CBI, with the central bank given a fixed mandate of low inflation and autonomy in how it achieves this.

But what is the reality of CBI and monetary policy? Here are some quotes from heterodox economists critiquing the mainstream consensus. Continue reading

Is full employment possible under capitalism?

An interesting interview with Robert Pollin on the Real News Network, in which he discusses the possibility of achieving full employment under capitalism. He considers the ideas on this subject of Marx, Keynes, Kalecki and Friedman.

For me, the historical record seems to support the ideas of Kalecki and Marx, in that achieving full employment may be possible, but sustaining it is much more difficult. This is because it tends to change the balance of power in society in favour of the workers, which the employers don’t like. If high inflation or a squeeze on profits is to be avoided, a new bargain between employers and workers is necessary.

The solution is thus a political one, and leads to a different kind of capitalism. It may be possible for a while but, once again, history suggests that this is hard to sustain, and that a squeeze on profits will result, leading to a slowdown in investment and growth and subsequently to a rise in unemployment once again. This also lends support to the ‘classical’ ideas of Anwar Shaikh on wages and unemployment, which I discuss here.

Modern Monetary Theory and inflation – Anwar Shaikh’s critique

9780199390632Last week I posted several times on Modern Monetary Theory (MMT), a set of ideas which seems to have plenty of support, or at least generates plenty of debate, judging by its presence on the internet.

MMT is an offshoot of post-Keynesianism. The policies which flow from its main theses suggest that a wise and benevolent state can ‘print’ money, within certain limits, to achieve full employment and moderate inflation.

Some MMTers also support an Employer of Last Resort (ELR) function for the state too. In other words, the state should provide a job at a set wage for all those who want one, so that full employment can be sustained even when economic growth slows or the economy goes into recession. The ELR policy was supported by Hyman Minsky whose ideas have also influenced MMT. He saw it as a more productive alternative to forms of welfare which pay people while they are inactive in terms of formal employment. Continue reading

L. Randall Wray – Why don’t economists and politicians get MMT?

A short video featuring L. Randall Wray, one of the leading proponents of Modern Monetary Theory. He discusses the reasons why economists and politicians struggle to understand it, and why non-economists, particularly those working in financial markets, apparently do not have this problem.

Towards the end, he mentions policymakers’ fears regarding the potential for inflation, which I shall return to in the context of MMT in a future post.

Dean Baker: Fed inflation target keeping wages low, people out of jobs – Radical Political Economy

This nine-minute interview with left-Keynesian economist Dean Baker discusses the wisdom or otherwise of the Federal Reserve’s interest rate hikes and their effect on jobs and wages. He notes that despite a low unemployment rate in the US, other measures of the ‘tightness’ of the labour market indicate that there may be more slack in the system and more room for job creation than allowed for by the Fed.

via Dean Baker: Fed Inflation Target Keeping Wages Low, People Out of Jobs — Radical Political Economy

Anwar Shaikh’s Classical theory of inflation

9780199390632Economic theory needs to account for the phenomenon of inflation. This post draws on Chapter 15 in Professor Anwar Shaikh’s recently published book Capitalism in which he outlines his theory of inflation under modern fiat money (state-backed money not fixed in value to gold or another commodity). He contrasts it with neoclassical and Keynesian theories, and provides empirical evidence to support his ideas.

The essence of Shaikh’s model is quite simple. Inflation, a rise in the overall price level in an economy, is determined by aggregate demand and supply, and these are influenced by three factors having either a positive or a negative effect on it: new purchasing power (PP), net profitability (the rate of profit minus the interest rate, rr) and the so-called ‘growth utilization rate’ (u).

PP is a demand-side factor, and the other two factors operate on the supply-side. PP is influenced by private and public sector credit, or a rise in borrowing to fuel greater spending in an economy. Note that this can be generated domestically or from abroad, for example through a rise in net exports. In theory, under modern fiat money, the amount of PP generated by the government ‘printing money’ has no limit, and history shows that in wartime, governments have often financed the extra demands on their activities through the creation of new money, which has given rise to inflation. This source of inflation, generated from the demand-side, seems similar to monetarist theory, in which the state is to blame via its intervention in the economy and its creation of an excessive growth of the money supply, and trying to keep unemployment below its ‘natural rate’. Continue reading